Poisoned Pizza

John Schnatter, better known as Papa John’s, owned 30 percent of the company’s stock in July of 2018. In order to repeal takeover attempts by Schnatter, the Papa John’s company decided to adopt a poison pill provision, also known as the Limited Duration Stockholders Rights plan. You may ask–what is a poison pill?

Poison pill, a term that sounds like it almost does not belong in banking, is a defense tactic utilized by a target company to prevent or discourage attempts of a hostile takeover by an acquirer (Investopedia). In 1982, M&A lawyer, Martin Lipton of Wachtell, Lipton, Rosen & Katz came as a knight in shining armor and invented the “poison pill” defense to prevent hostile corporate takeovers. The name is explained by the attempts being something that is difficult to consume or accept, and poison pills raise the costs of acquisitions significantly. Therefore, there is a big disincentive to deter the attempts completely. In order to “use” this poison pill, shareholders can vote to favor the acquisition through the shareholder rights plan.

There are two types of poison pills, the first being the “flip-in poison pill” where shareholders purchase additional shares at a discount and the “flip-over poison pill”, where the stockholders purchase shares of the acquired company at a deeply discounted price. In the first type, the acquirer’s interest becomes more diluted and the cost of the bid becomes higher. This type is more commonly followed.

So what happened to Papa John? Papa John’s board of directors adopted a poison pill provision and granted existing investors with the exception of Schnatter a dividend distribution of one right per common share. This tactic effectively made a hostile takeover of the company unattractive as Schnatter would have to pay twice the value per share of the company’s common price.

Poison pills protect minority shareholders and in the case of Papa John, who was put under light for racist comments at the same time of the poison pill provision, the board of directors were very against the idea of Schnatter taking over the company. Many companies like Netflix, GAIN Capital, Micron Tech and Pier 1 Imports have implemented this method of defense in the past five years.